We discussed many topics in this Retirement Blog such as safe retirement investing, when to take social security, how to save on taxes…etc. One of the favorite places for retirement nest eggs is bank CDs. While this choice is rock solid safe and easy to access in case of an emergency, it may not be appropriate for all of your retirement money. Bank CDs are like chocolate – a good thing that can be overdone. In this month’s Internet video seminar we’ll discuss:

Far too many retirees just blindly put all their retirement money in short-term bank CDs without thinking about all the extra taxes they’ll be paying and the higher interest rates they can get elsewhere. Also, if bank rates are less than the rate of inflation – and that’s the case today – the longer your money stays in the bank the less it will buy. There are other safe alternatives that may be suitable for your retirement money, and you owe it to yourself and your loved ones to get as much return as possible without taking risks. The more income you have in retirement, the better you can live.

This Internet video seminar is free, educational and accessible on-line. You don’t have to leave home, can tune out anytime and remain anonymous while you learn more about your retirement alternatives. My objective in this free presentation is to help you and your loved ones make better retirement decisions. I sincerely hope you’ll register now and plan on joining in.

- Shelby Smith, Ph.D.

<<Update>> If you missed April’s Retirement Video Seminar online you may watch the re-broadcast on “When Bank CDs Make Sense” by going to the video library section of this website.

Many of you are in the red zone right before retirement, or you’ve already retired. No doubt your number one fear is running out of money in retirement. You’re part of a very large and growing demographic force: 35 million over age 65, 50 million drawing Social Security and 78 million baby boomers now turning 62. This means the future demand for everything used by the “retirement set” will increase, and “retirement prices” will rise dramatically. Many of you may have accumulated a retirement nest egg in a pension account, will draw a company pension and/or have other savings and investments earmarked for retirement. Where should you keep your retirement money?

If you’re keeping up with economic and financial developments, here’s what you’re seeing: sub-prime credit meltdown that has destroyed housing and is now spilling over into automobile debt and credit cards; highly volatile stock and bond markets; a weak dollar fueling higher prices for oil and other goods; more unemployment and rising inflation; retail sales, consumer confidence and new jobs creation in sharp decline; drastic interest rate cuts by the Federal Reserve to avoid a recession; a money giveaway stimulus package from Washington to prop up the lagging economy; widespread talk of recession and stagflation. These all add up to troubled economic times which should prompt you to review where you have your retirement money.

Learn about “safe” retirement planning today.  If you missed the video webcast on “Economic Outlook for Retirement Investing” you may watch the re-broadcast seminar by going to the Retirement Video Library Or by using this link >>

You can now buy insurance to protect you and your spouse against outliving your money. This coverage is for the retirement-minded whose biggest fear is living longer than their money. You simply deposit with an insurance company part or all of your retirement money, and they guarantee you, and your spouse, a lifetime annual income. Let’s see how this works.

Let’s assume you’re age 62 and retirement is heavy on your mind. You’ve been saving money during your working years, and let’s say you now have $500,000 to pay for your retirement years. You’ve determined that you’ll need at least $50,000 in guaranteed annual income when you retire at age 66. How could you arrange this lifetime guaranteed income now that will be ready for you in four years?

Let’s make this easy by assuming your only other source of income will be Social Security. By using the calculators at www.ssa.gov you’ve estimated your Social Security benefits will be $25,803 per year. You are interested in getting a guarantee from an insurance company to pay you the remaining $24,197, so you’ll have the $50,000 annually you have decided is adequate. The insurance company offers you a fixed index-linked annuity which guarantees that your money will grow by at least 7% annually until you turn it into an income (yes, there are annuities from top-quality insurance companies that will do this). The annuity you have chosen will also pay a 10% bonus when you open the account. Yes, such bonuses are available if you shop. At age 66, the annuity you have selected will guarantee you a lifetime annual income equal to 5.5% of the present amount in your account. Also, some annuities offer protection against inflation.

Since you’ll need $24,197 in four years, which will be 5.5% of your annuity’s account value, we know that $439,945 will be needed four years hence ($24,197 divided by 5.5%). This is where the math gets complicated, so call your financial advisor. If you invested $305,120 of your $500,000 retirement money with the insurance company today, and they credited you with a 10% bonus and guarantee that your account would grow by at least 7% annually over the next four years, you’d have the needed $439,945 when you retire at age 66. You and your spouse are now guaranteed to never run out of money during your lifetime, plus you have about $200,000 left, and growing, to cover emergencies.

But, what happens if you die too soon? The bad news is that your worries about money are over, but the good news is that your spouse continues getting the income if you chose the joint life option. If you chose the single life coverage, the remainder of your account value goes to your beneficiary. The account value is based on the market index to which your annuity is linked so that you avoid all market loses but participate in the gains. Additionally, you’re guaranteed a minimum rate of return by the insurance company even if the market loses every year. You’ve got upside opportunity without downside risk!

You’re set for life because the insurance company must pay you until you die, and Social Security is an entitlement for your lifetime. What’s more, you can start, stop and store the annuity income if your circumstances change (win the lottery or get an inheritance) AND there are no current taxes on the earnings until you actually start your income. You’ve covered your longevity risk without giving up control of your money. Your income is guaranteed for life, but you still have all your other options.

Are these policies fair to the policyholders? Insurance companies are successful because they spread the risk over a large population and price for the “average” outcome. This “average” outcome allows them to make a profit and simultaneously deliver a valuable service by protecting their policyholders against losses they can’t afford. In our longevity case, some live too long and benefit greatly while others die prematurely and benefit less. But, if you and your spouse have longevity insurance, you’ll have peace of mind knowing you can’t outlive your retirement money. Call your financial advisor and talk to him/her about insuring against this risk.

Shelby J. Smith, Ph.D.
March 2008

There is currently a lot of talk in the press about how reverse mortgages can be used to supplement your retirement income. Some sources advocate the use of reverse mortgages while others preach against them. First of all, reverse mortgages, like virtually every investment or financial decision, are good for some and bad for others. How they apply to you depends on your circumstances and what you’re trying to accomplish. Let’s set the record straight on reverse mortgages and retirement planning.

A reverse mortgage, as the name implies, is the opposite of a regular mortgage. Instead of making monthly payments on your home mortgage, the equity you’ve build up in your home over the years pays you. To qualify for a reverse mortgage you must meet two conditions: first, every person on the deed must be age 62 or better, and second, you must have enough net equity in your home to make a reverse mortgage loan feasible. The same lenders that offer traditional, or forward, mortgages also offer reverse mortgages.

A reverse mortgage is not related to your ability to repay the loan, having a job, your income or net worth. The only requirement other than being age 62 or better is that the equity in your home must be sufficient to justify the reverse mortgage loan. When you apply for a reverse mortgage you’ll go through the normal steps of obtaining a mortgage: an appraisal, title search, confirmation of insurance coverage, inspection, etc. The reverse mortgage closing costs can be taken from the loan proceeds so you can avoid out-of-pocket costs.

The interest on a reverse mortgage loan is accrued and added to your loan balance. Accordingly, the loan balance will grow throughout the life of the reverse mortgage; however, you have no personal liability to repay the reverse mortgage since the home is the only collateral for the reverse mortgage loan. If the home is not sufficient to repay the reverse mortgage loan, the shortfall is not your concern. When you pass on or move on, the loan can be repaid from the sale of the home with any shortfall being the responsibility of the lender and any excess going to you or your estate. The reverse mortgage can also be repaid by getting another loan, paying the balance from your savings or investments or the children/beneficiaries could repay the loan and obtain clear title to the home.

You cannot be evicted nor can the you be foreclosed as long as you are alive, living in the home, maintaining your insurance coverage and keeping the home in reasonably good repair. If you are married, the reverse mortgage loan is not repayable until the death, or moving, of the last spouse. You can take the reverse mortgage loan proceeds, less closing costs, as a lump-sum, installment payments or have a line of credit established with the lender that you can access at any time. There are no restrictions on how you can use the money from a reverse mortgage: vacations, new car, investments, vacation home, giving money to children, or whatever. Before reverse mortgages you had access to the equity in your home only by selling (and generally moving) or by refinancing (meaning payments would start all over again). This third option — reverse mortgage — is something you need to know about and consider should you ever need the equity from your home to help improve your retirement lifestyle. The reverse mortgage allows you to stay in your home and turn your home equity into spendable cash for other uses. The question is: why would you do a reverse mortgage? First and foremost, you might need the money for retirement or to cover an emergency. Secondly, a reverse mortgage could be incorporated into your estate planning by using the equity in your home to purchase a paid-up life insurance policy to pay tax-free death benefits to your children, charity or beneficiary. Third, you just might want to splurge and take an around-the-world vacation, buy that sports car you’ve always wanted or buy a second home on the lake rather than leaving the equity in your home to be fought over by the kids.

A better question is: why would you not want take a reverse mortgage loan? Many retirees use a reverse mortgage loan to finance investments. In fact, the reverse mortgage specialist helping you might even recommend making an investment with the loan proceeds. Generally, this is not a good idea because rarely will the return from the investments cover the interest and closing costs associated with the reverse mortgage. Far too often, a retiree will unlock the equity in their home using a reverse mortgage loan and then turn right around and buy a long-term investment that keeps their money locked up and out of their reach. This is generally a bad idea.

The one exception that oftentimes makes a great deal of sense is using the reverse mortgage money to purchase a guaranteed lifetime income to supplement your Social Security or other retirement income. A guaranteed lifetme income is generally obtained by purchasing an annuity from a life insurance company. Annuities now allow you to obtain a guaranteed lifetime income but still retain control of your money in case you change your mind about the lifetime income, need a lump sum to cover an emergency or get an opportunity to purchase a higher lifetime income should the economic/financial picture change. By using the reverse mortgage loan, which you do not have to repay during your lifetime, to purchase a guaranteed lifetime income you cannot outlive, you could remove the anxiety and fear of running out of money before your death. All the while you are assured of a place to live, no mortgage payments and the peace of mind of knowing that you’ll have a new income source for the remainder of your life.

The reverse mortgage loan is a great tool that can be used to improve your retirement and you definitely should learn more. But, before taking out a reverse mortgage loan make sure you have a sound reason and have a definite non-risky use for the money or need extra income to supplement your retirement income. If you simply want to “be prepared” just in case you need money for an emergency, leave the reverse mortgage money in a line of credit at the lender.

Generally, the costs associated with a reverse mortgage are no greater than you’d incur if you sold your home to free up the equity, but shop the market for the lowest closing costs. Also, there are several programs – some government sponsored while others are private – and you’ll want to review all your options. Again, don’t do a reverse mortgage just because you want to take the money and invest it hoping to “beat the market” or speculate you’ll make a higher return than the reverse mortgage loan is costing. Also, make sure you get professional help by talking to your banker or financial advisor before proceeding.

Have questions about your retirement investments? View questions and answers in our Expert Archive that we’ve given to others inquiring about their retirement investments: http://www.theretirementpros.com/ask_expert.php

Join Dr. Shelby Smith’s video seminar online (usually 10 min long or less) on safe retirement planning: http://www.theretirementpros.com/Tele-Seminar-MRM.php